On April 25, 2012, former managing director for Morgan Stanley's real estate business in China, Garth Peterson, 42, an American citizen living in Singapore, pleaded guilty in federal court in Brooklyn, NY to a one-count criminal information charging him with conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the Foreign Corrupt Practices Act ("FCPA").
In the Federal prosecutors Press Release, it is asserted that:
Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials. Morgan Stanley's internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment. Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-corruption laws. Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies 54 times. During the same period, Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times. Morgan Stanley's compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments. Moreover, Morgan Stanley conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.
Form Over Substance: And yet, despite all of those impressive compliance protocols and policies, Morgan Stanley still couldn't prevent the criminal conduct alleged in this case and, gee, no one at the firm had an inclination about what was going on for a really long time.
Unfortunately, so much of what passes for compliance activity on Wall Street always seems impressive but for some odd, inexplicable reason, under the pressure of real world events, the impressiveness of these compliance safeguards often wither and come off as more form rather than substance. I mean, c'mon, how else do we explain why we keep reading about all these multi-faceted and multi-layered compliance regimes that never quite seem to catch the humongous violations until way, way after the fact? For a case involving the failure of internal compliance controls used to verify the accuracy of supposedly independent and accurate "Mark to Market" prices submitted to the Bank of Montreal by one of its traders, read: Commodities CEO Gets 30 Months In Prison In Mark To Market Scheme (April 26, 2012).
In Peterson's case, the prosecutors alleged that he had conspired with others to circumvent Morgan Stanley's internal controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official , who was his friend. According to the allegations, Peterson encouraged Morgan Stanley to sell an interest in a Shanghai real-estate deal to Shanghai Yongye Enterprise (Group) Co. Ltd., a state-owned and state-controlled; however, in reality, Peterson was arranging a deal whereby the interest would be conveyed to a shell company.
Gee, let's see here, who could possibly control that shell company? Eureka! Turns out that the shell was controlled by Peterson, a Chinese public official associated with Yongye, and a Canadian attorney. In 2006, Morgan Stanley sold the interest to the shell company at a discount, which resulted in an immediate paper profit of more than $2.5 million.
Peterson faces a maximum penalty of five years in prison and a maximum fine of $250,000 or twice his gross gain from the offense.
The prosecutors' Press Release advises that:
After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson's conduct. The company voluntarily disclosed this matter and has cooperated throughout the department's investigation.
Separately, the Securities and Exchange Commission filed a Complaint in the Eastern District of New York and announced a settlement with Peterson. The SEC Complaint charged Peterson with with violations of the anti-bribery, books and records and internal control provisions of the FCPA, and with aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940. Peterson consented to a court ordered disgorgement of $254,589 and to relinquish to a court-appointed receiver the interest he secretly acquired from Morgan Stanley's fund in the Jin Lin Tiandi Serviced Apartments (currently valued at about $3.4 million). Peterson consented to permanent industry bars based on the anticipated entry of the injunctions against him and his criminal conviction.
Bill Singer's Comment
Not to be too philistine here but are we all living in the same world? Given the recent headlines about Walmart and Mexico, and other similar FCPA cases, are we enforcing upon American businesses a code of conduct that is aspirational but not practical? Are we setting up a system of business ethics that is setting up American business for failure when it comes to the realities of the emerging nations and developing economies?
NO - absolutely do not infer from those questions that I am espousing bribery and corruption as tools for market penetration or boosting revenues. Carefully re-read my comments and note a lack of advocacy by me for that position. What I am doing is raising the questions:
- How are our businesses supposed to compete in corrupt societies when the price of admission to various markets is a bribe, a kick-back, or the offer of hidden participation in a high-stakes deal?
- What advantage is gained if the dirty dollars are paid by a Russian, a German, or a Japanese company but not an American - and if you advocate such a next-in-line solution, how does that benefit the victimized nation if the corruption comes at the hands out of the pockets of a non-American?
Without question, we should not be involved in a race to the bottom. That compromised vision was partially responsible for the domestic policies that pushed us into the Great Recession. On the other hand, business is not conducted in an MBA classroom but in the back alleys and darkened back rooms of far too many unscrupulous "fixers" in impoverished and emerging nations. In North Africa and the Middle East, such conditions provoked uprisings. In other regions, the official response ranges from benign indifference to charging the executed for the cost of the bullet.
Ultimately, we risk becoming betrothed to hypocrisy if we do not successfully wrestle with the challenge of acknowledging the pervasive corruption of many foreign business environments and formulating a practical response as to how our nation - we as a people - choose to deal with such corruption. Pretending that ponderous layers of compliance policies are the solution is ridiculous - as if the repetitive nature of these FCPA prosecutions don't prove that truth.
Again, don't put words in my mouth. I am simply serving the role of anagent provocateur here. These questions need to be asked and the answers given due consideration.